During Heaton Company's first two years of operations, it reported absorption costing net operating income as follows Year 1 Year 2 Sales ( $61 per unit) Cost of goods sold ( $36 per unit) Gross margin Selling and administrative expenses* Net operating income $976,000 1,586,000 576,000 936,000 650,000 300,000 330,000 S 100,0001 320,000 *$3 per unit variable; $252,000 fixed each year The company's $36 unit product cost is computed as follows Direct materials Direct labor Variable manufacturing overhead Fixed manufacturing overhead ($399,00021,000 units) Absorption costing unit product cost 19 $ 36 Forty percent of fixed manufacturing overhead consists of wages and salaries, the remainder consists of depreciation charges on production equipment and buildings